On Our Radar

On Our Radar

Rent or Buy? More Young People Are Choosing Homeownership

For the first time in a decade, more new U.S. households in the first quarter chose to buy homes than to rent, suggesting a long-term decline in homeownership rates might be coming to an end.

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Some 854,000 new-owner households were formed during the first three months of the year, more than double the 365,000 new-renter households formed during the period, the Census Bureau said Thursday.

That is the first time since the third quarter of 2006 that the number of new homeowners outstripped that of new renters, according to Ralph McLaughlin, chief economist at Trulia.

To be sure, the overall homeownership rate ticked down to 63.6% in the first quarter from 63.7% in the fourth quarter.

But economists were encouraged by the increase in new households that have joined the ownership ranks.

Household formation is a key driver of the housing market, both for home purchases and rental units. The fact that more of the new households formed in the first quarter chose to own rather than rent could signal the beginning of a reversal of a long-term decline in overall homeownership.

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"The fact that many new owner-occupied households are forming is really our first sign that the homeownership rate is on the rise," Mr. McLaughlin said.

The homeownership rate peaked at just over 69% in the mid-2000s before falling to a 50-year low of 62.9% in the second quarter of 2016. It has hovered around 63.5% for the last couple of quarters, below the long-term average of around 65%.

Any lasting increase could be good for the overall U.S. economy. Buying a home contributes more to the economy than renting. More workers are required to build a single-family home than a rental unit, and homeowners spend more on renovations than renters.

An analysis by the Rosen Consulting Group found that the home-building industry would have added more than $300 billion to the economy last year if construction returned to the long-term average. In 2016, total spending on housing clocked in at 15.6% of gross domestic product, compared with a 60-year average of almost 19%.

The creation of more new-owner households also indicates Americans are more confident in the economy.

"People are looking at housing as being a bit more attractive as memories of the financial crisis fade," said Joseph LaVorgna, chief U.S. economist with Deutsche Bank.

A handful of other recent signs suggest demand for homeownership is gaining strength. Sales of previously built homes reached their strongest sales pace in a decade in March, up 4.4% from the previous month, the National Association of Realtors said last week. U.S. new home sales were up 5.8% in March, the third consecutive month of improvement.

Home builders say they have also been seeing increased interest from first-time buyers and are looking to build starter homes to accommodate them. First-time buyers made up 32% of the market in March, up from 30% a year earlier, according to NAR.

Eric Thomas, a 28-year-old who works in the medical-device industry in Cleveland, said a recent promotion helped spur him to get off the fence and buy. Mr. Thomas, who moved back to his native city from Chicago a year-and-a-half ago, said he looked at 30 houses and saw many of them go for $5,000 to $10,000 over the listing price.

The home he recently purchased is 2,000-square feet with a finished basement for $170,000, which translates to the same monthly payment as his former garden apartment in Chicago.

"I was sick of throwing money away into rent," Mr. Thomas said.

Some researchers predict the homeownership rate will resume its decline because of a growing minority population (minorities are less likely to own homes), growing student-debt burdens and rising rents that make it difficult to save for a down payment.

Susan Wachter, a professor at the Wharton School at the University of Pennsylvania, is among those who predict the homeownership rate could fall closer to 50% by 2050.

"The order of magnitude to get us back to historic norms just is not in this data," she said.